The stage has been set for a battle between unitholders and management of Energy Income Fund

The stage has been set for a battle between unitholders and management of Energy Income Fund. And the battle – that focuses on the fund’s decision to raise capital by way of warrants at a price deemed to be too low by a group of dissidents – could be a long drawn out affair.

The first round started a week back when Shea Nerland Calnan, a Calgary-based law firm retained by the dissidents, requested Crown Hill Capital Corp., the fund’s manager and trustee, call a unitholder meeting. The dissidents wanted Crown Hill replaced by Aston Hill, a Calgary-based manager. They also wanted the meeting to be held by February 17 in Crown Hill’s Toronto head office.

The dissidents could make such a demand because they claim they own sufficient units.

“Section 12.1 of the Amended and Restated Declaration of Trust of Energy Income Fund states that a meeting of the unitholders shall be called by the trustee upon the written request of the holders of not less than 20% of the issued and outstanding units,” said David Calnan. “We forwarded requisitions for a meeting executed by holders of 1,858,500 units of Energy Income Fund which represents 24.9% of the issued units,” he said, noting that according to information it received from the TSX, Energy Income Fund has 7.46 million units.

To make that request, the requisitions from the about three dozen dissidents had to be aggregated. (It’s not known when the dissidents acquired their units.) Enter CIBC Wood Gundy, the firm whose clients own the units. It then submitted the request and the confirmation of beneficial ownership.

This week, round two got underway when Crown Hill responded. “After review, the trustee and its legal counsel have determined that, for a number of reasons, the requisition is not valid.” Crown Hill then added that “the trustee does not intend to comment further on this matter at this time.”

The reasons for the trustees’ decision arguing the requisition “is not valid” are expected to be made available Friday.

One possibility is that Crown Hill may suggest that the dissidents are acting in concert and have violated the 10% rule required for disclosure and the 20% rule triggering a takeover bid.

What’s next?

Depending on what’s said Friday, the operative word seems to be “stay tuned.” Proxy battles and court actions are possible – and perhaps common sense.

Crown Hill couldn’t be reached for comment.

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The dissidents’ main beef is the $5 price Crown Hill has attached to the warrants and the large discount between it and net asset value.

The warrants were offered to existing unit holders of record as of Oct. 7, 2011 on the basis of one warrant for each unit held. The accompanying prospectus was filed Sept 22. At the time, $5 was 95% of the closing price of the units. NAV was about $5.75.

The unitholders have until March 1 to make up their mind.

If unitholders exercise, the fund’s market cap and the liquidity of the units will increase.

“Warrantholders will have the opportunity to potentially acquire units at a price lower than the trading price in the marketplace,” said a note on Crown Hill’s website. While warrant offerings (and rights offerings) have become a popular way for a closed end fund to raise additional capital, the dissidents argue that the discount to NAV is too high.

According to its web site, since the end of October the discount has varied from the current low of 19.06% and the December high of 24.20%. According to Bloomberg, the discount has widened out since the warrant offering was announced.